"No nation can preserve its freedom in the midst of continual warfare." - James Madison

Thursday, February 19, 2009

Swedish-Made GDP Enlarger

Apparently there's talk going around normally laissez-faire-friendly circles that we should nationalize the banks, kind of like the Swedes did when their financial system was going pear-shaped in the 1990s. (The Wonkette site linked to here contains links to FT articles at the bottom that are a lot more information-friendly.) The advantage here would be that the taxpayers would stop being sugar-daddies and start being shareholders in the banks - meaning that if the banks are managed back to health, we come out okay revenue-wise when we sell the banks back to shareholders in the private sector. (Which kinda means we buy banks from ourselves and sell them back to ourselves when we're done with them. Economics makes no sense.)

Anyway, I don't see this as a particularly bad idea. If we're going to bail out banks, and it seems we've made the decision to do so, we might as well go all-in with it. The half-assed way we've been conducting the bailout hasn't done a damn thing where loosening up credit markets is concerned, and it's far from clear that we'll see that money again if banks get back on their feet.

I still think it would have been best to let one of the investment houses go into bankruptcy proceedings - this would have panicked people a little bit, but it would have settled once and for all what those damn mortgage-backed securities were worth and could have saved us a lot of trouble in the long run. But we're past that point now, and as long as we're involved with this bailout, we might as well do it right.

2 comments:

Banks getting bailouts ought to be lending out at least as much, if not more to consumers.

The problem:

That wouldn't address the problems banks have. Banks are severely undercapitalized because all their assets suddenly became worthless. Bailouts are going - predictably - not to loans, but to rebuilding balance sheets.

To the extent that this is where bailout money goes, it will reinvigorate lending - eventually - as banks get into a position where it's prudent to do so.

(Side note: banks that are doing this have no business paying bonuses or large salaries, though. Such uses of bailout money are obscene, as banks out to be recapitalizing in every way they can).

It's not very rational to condemn banks for making bad loans and then turn around and ask them to do just that. We want lending happening, but we want it to be good lending, to credit-worthy people. Otherwise, we're spending a lot of money to make more bad loans.

The problem is in comparing loans now to loans before the financial kaboom. The proper comparison would be to where loaning would have been without the bailouts - something we can't really do, but something that I believe would have been much worse than where we are... which would suggest taht maybe the bailouts are doing something after all.

Giving money away without any "cost" to the banks is ridiculous. I'm in favor of what Krugman (I believe) has said - existing shareholders are wiped out completely. The debtholders become the new equity holders, and the US becomes the new debtholder - essentially, a bankruptcy. No bank stock should have any value if the company has failed and needs taxpayer support to keep it up - otherwise, the stockholders get all the upside potential but not the most serious downside risk.